Institute for Energy Economics & Financial Analysis: 'TIAA Fails Clients on Climate'

LAKEWOOD, Ohio, Jan. 3 (TNSrep) -- The Institute for Energy Economics and Financial Analysis issued the following white paper on Nov. 16, 2022, entitled "Teachers Insurance and Annuity Association of America Fails Clients on Climate."

The white paper was written by Tom Sanzillo.

Here are excerpts:

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Executive Summary

Over the last decade, a number of institutional investors have set a new standard for leadership on climate change. Universities, pension funds, churches, banks, and entire nations have divested their holdings in fossil fuels, driven by the long-term weak financial performance of coal, oil and gas stocks; the increasing frequency and intensity of droughts, storms, floods, and fire; and the scientific consensus on the causes of global warming. In late 2021, the Teachers Insurance and Annuity Association of America (TIAA) and its investment manager Nuveen issued a Climate Action Plan (CAP). The plan is modest and disappointing--with at minimum $78 billion invested in fossil fuels, TIAA has a long way to go to become a climate leader.

The financial case for fossil fuel divestment is strong. For most of the last decade, fossil fuel stocks clustered at the bottom of the market, overproducing and following an outmoded business model that exposed them to price volatility. With Russia's invasion of Ukraine raising oil prices, the industry's fortunes have improved. But the invasion has stripped away any pretense that the industry is governed by supply and demand. The high oil prices and improved financial fortunes of investors are now driven by command and control in Russia. Some producer and consumer countries have responded by doubling down on fossil fuel infrastructure expenditures and by pledging long-term support for fossil fuel consumption. However, it is clear that that future of the fossil fuel industry is both volatile and unstable.

TIAA's failure to fully consider divestment as a mechanism to protect its portfolio is a striking lapse in its fiduciary obligations. TIAA has made it clear that climate risk is financial risk. The company's failure to consider taking a strong defensive step and divest its fossil fuel holdings to clear its portfolio of the risk is logically inconsistent, financially imprudent and strategically unsound. It is difficult to see how its Climate Action Plan can meet its net zero goals without a clear, policy-based use of the divestment option.

Serving a customer base of educational, cultural, health and social service professionals who are knowledgeable about the dangers of fossil fuels and alarmed by rapidly accelerating global climate change, TIAA is well-positioned to undertake much more significant leadership on sustainable investing. The company claims its climate plan will eventually address its enterprise-wide $1.4 trillion portfolio of bonds, real estate, private equity and stocks. Its portfolio has been shaped by its legacy as an insurance company. The legacy leaves it with a portfolio weighted heavily in fixed income investments (bonds). To balance out the bond market, TIAA and its principal subsidiary Nuveen developed a private equity portfolio that adds higher returns and greater risk. The company's substantial real estate portfolio is innovative when it comes to implementing climate initiatives, but it falls short in many other asset areas.

This review focuses on TIAA-Nuveen's Climate Action Plan, and more broadly on its $1.4 trillion portfolio. The findings of the analysis are as follows:

* The first phase of the Climate Action Plan covers TIAA's $285 billion General Account. TIAA's corporate bond portfolio and real estate holdings in the General Account are considered the first priority investments. They constitute $136.5 billion and $3.4 billion of the General Account, respectively. This $140 billion constitutes 10% of the TIAA's total $1.4 trillion assets under management, a small, unambitious priority.

* IEEFA conservatively estimates that TIAA's enterprise-wide portfolio of $1.4 trillion contains $78 billion in fossil fuel risks. Our finding is heavily qualified due to a lack of transparency. TIAA should use the CAP process to address this opaqueness in the future.

* TIAA's public corporate bond portfolio is heavily weighted with fossil fuels. A review of its $136.5 billion corporate bond portfolio in its General Account finds that the corporate bond portfolio carries an estimated 17.2% exposure to fossil fuel and utility companies.

* IEEFA estimates that approximately 12%, or $4.7 billion of the $34.1 billion General Account private equity portfolio has significant carbon exposure. TIAA's private equity investments, currently called "other investments" and ranked a "low priority" for climate action, should be a much higher priority. The portfolio contains fossil fuel companies and financiers that have generated worldwide controversy due to their fossil fuel holdings. TIAA can bring an end to that outmoded legacy. Full disclosure of the holdings would be pathbreaking and consistent with TIAA's professed commitment to leadership on transparency.

* The $10.1 billion in stocks in the General Account is a miniscule portion of TIAA-Nuveen's vast holdings. However, these holdings are structured by an investment policy that covers the total estimated $501 billion in equity holdings, and therefore have much larger implications. IEEFA estimates that approximately 7% of the equity portfolio is exposed to fossil fuels. The first installment on TIAA-Nuveen's Climate Action Plan is an opportunity to signal its longer-term perspective on fossil fuels. Even to bring this small portion into net-zero alignment, TIAA must consider major reforms to its individual and institutional customers. Will TIAA offer fossil free or decarbonized alternatives, or maintain its commitment to the losing proposition of fossil fuel equities?

A. Recommendations

This report makes a number of recommendations that TIAA's board and management can take immediately. Other recommendations can be phased in over time, with greater transparency and deliberation.

At the top of TIAA-Nuveen's climate change agenda should be a decision to stop investing in fossil fuels. Then, the company needs to improve transparency. TIAA is a large institution--its holdings are complex and its corporate layers can be incomprehensible to the outside observer. It is beyond the scope of this report to establish a definitive account of TIAA's carbon footprint, but this work should be central to the company's efforts to both identify and mitigate its role in supporting carbon emissions.

In the next stage of its Climate Action Plan, TIAA-Nuveen needs to include--at minimum--the following specific steps:

1. Do not make new bond purchases in the General Account from companies and utilities exposed to fossil fuels. In 2021, the company bought $35.6 billion in bonds. An exclusion list can be generated quickly, and the ban can be communicated to Nuveen and TIAA staff and external bond advisors immediately. To round out the policy changes, publish a list of high- carbon emitters in the portfolio, the timing of bond maturations, a strategy for engagement, and a clear policy guide to divestment/reinvestment, new purchases and refinancing.

2. Do not make new private equity or other asset purchases in the General Account from companies and utilities exposed to fossil fuels. This can be communicated to Nuveen and TIAA staff and external money managers immediately. Compile a list of high emitters in the private equity and other asset portfolio, articulate a strategy for engagement, and lay out clear standards for divestment/reinvestment.

3. Reduce, with the aim to eliminate, high emitters from TIAA's equity holdings. The $10.1 billion stock portfolio in the General Account is invested largely in funds and indexes sponsored by TIAA and Nuveen. From a policy and institutional perspective, the treatment of the stocks in the General Account portfolio has significant, long-term implications for TIAA, its customers and the estimated $500 billion enterprise-wide stock portfolio. How the company will align these holdings with the broader portfolio requires TIAA to decide now: Will it be offering fossil-free alternatives as leading products for individual and institutional funds and/or will it align all of its current equity products and indexes to achieve fossil-free status?

4. Clarify the standards to be used in TIAA-Nuveen's real estate carbon assessments and plans for corrective action for the General Account's $3.7 billion in investments. Create a publicly available, regularly updated reporting protocol. This data should guide TIAA-Nuveen's internal goals and provide an industry model for reporting on climate change initiatives. The CAP report should offer clear guidance on the implications of these steps for the full $156 billion real estate investment portfolio.

B. Customer Concerns

TIAA has garnered 17 resolutions from faculty groups in the United States calling on it to divest from fossil fuels. The resolutions reflect the trends shaping educational institutions around the world. There are now more than 1,500 institutions worldwide that have decided to divest in a manner that is consistent with the risk assessment and philosophy that governs each of the individual funds. Recent polling strongly suggests that college-educated professionals (TIAA's customer base) have a strong interest in climate change.

On Oct. 19, 2022, almost 300 clients of TIAA/Nuveen filed a complaint with the Principles of Responsible Investment (PRI) initiative. The complaint highlights TIAA/Nuveen's investments in fossil fuels and timberlands that are in apparent violation of the climate change principles it pledged to follow when it joined PRI. The complaint requests a thorough review of TIAA/Nuveen's policies and practices, as well as a corrective action plan.

TIAA has an opportunity to realign its portfolio and reporting with the growing sustainable economy. The energy transition is creating significant shifts in the direction of investment capital. This trend will continue, and TIAA can greatly assist the finance sector by showing how a climate conscious fund can integrate the energy transition into its operations and investment portfolio.

C. Method

The precise figures generated by IEEFA in this report must be considered highly preliminary. The magnitudes and trajectories, however, are clear and reliable. TIAA's system of reporting is designed to comply with insurance industry regulatory requirements and the needs of individual and institutional investors. The data is NOT meant to be used as the basis of a fossil fuel or carbon footprint analysis. In its Climate Action Plan, TIAA/Nuveen promises to undertake that task.

In this report, IEEFA relies on a series of reports and website postings from both Nuveen and TIAA, including annual audits, annual and quarterly filings with the New York State Department of Financial Services (DFS), fund and index annual reports, and press releases. The investment portfolio of TIAA is highly complicated and layered. The various documents prepared by Nuveen and TIAA have different accounting methodologies and categories, definitions, and valuation methods that cannot easily cross between documents. IEEFA has requested clarification from TIAA on these issues, but our requests have gone unanswered.

This report attempts to assemble the data in a format that: a) describes the broad categories of assets under management; b) provides some indication of the value of the assets; and c) identifies the fossil fuel exposure of the fund, index or company. For most of the report, IEEFA found it necessary to rely on definitions provided by TIAA, which remain mostly unclear; extrapolation of subsamples of assets rather than complete accounting; and manual transfers of large amounts of data from company filings. All of these steps create the potential for error in the data and analysis. Despite these impairments, IEEFA remains confident in the magnitudes and trajectories provided in this report. It is anticipated that the upcoming CAP report published by TIAA will sharpen definitions, accounting and policy direction. This will undoubtedly correct and update any flaws in this report.

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Conclusion

TIAA has announced it will adopt a climate action plan that will allow it to meet net zero standards. This report analyzes TIAA's publicly released plan and argues that it has serious shortcomings. As TIAA proceeds with the plan, it can correct these shortcomings. This report offers an approach as TIAA proceeds with its Climate Action Plan.

This report provides a rationale for TIAA to divest from fossil fuels and the role it can play in TIAA's Climate Action Plan. It offers suggestions on how to think about it in most of the relevant asset categories where TIAA is active. The report contains evidence of other funds pursuing similar paths, funds that have secured the requisite diligence and settled on trading and asset management strategies consistent with the mission of the fund.

This report also points out the current disclosures and reports that are traditionally filed by TIAA and its subsidiaries. Those reports are of limited value to the issues involved with understanding fossil fuel exposure. There are resources available to improve reporting, some of which TIAA has already relied on.

The Board of TIAA is the entity charged with policy and oversight for the assets under management. As discussed above the Board must act in order to fully consider divestment as part of its Net Zero Climate Action Plan. The rejection of divestment of fossil fuel assets in whole or in part by TIAA has been arrived at prior to a full consideration of its scope or impact on TIAA's assets under management. The Board's responsibility is to direct the staff to achieve the goal of a fossil free portfolio.

IEEFA has provided an example of a resolution that the Board might vote on to communicate the underlying policy goals involved:

RESOLVED: TIAA's investment portfolio on an enterprise-wide basis is to be fossil free by January 1, 2030. The board requests the staff and advisors produce a plan that achieves this objective. The plan should be produced no later than April 1, 2023.

As demonstrated in a number of places in this report, there are numerous investment options that are available to the staff and board. The staff and board have chosen to dismiss divestment without fully considering what a fossil-free portfolio that met investment targets would look like, how it would be implemented, how it fits into a net-zero strategy, and over what time frame. Instead, it has treated the issue of divestment as casual, cocktail party chatter. Without a full consideration of divestment, TIAA's statement that climate risk is financial risk is not credible and TIAA as an institution remains an industry laggard on climate change.

As it stands, the board's actions do not align with its statement that climate risk is financial risk. Without recognition of this lapse and the role of divestment in filling it, the CAP will remain an ill-considered initiative. And in the end, it is the board's responsibility and decision to act.

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About IEEFA

The Institute for Energy Economics and Financial Analysis (IEEFA) examines issues related to energy markets, trends and policies. The Institute's mission is to accelerate the transition to a diverse, sustainable and profitable energy economy. www.ieefa.org.

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About the Author

Tom Sanzillo

Tom Sanzillo, director of financial analysis for IEEFA, is the author of numerous studies on the oil, gas, petrochemical and coal sectors in the U.S. and internationally, including company and credit analyses, facility development, oil and gas reserves, stock and commodity market analysis and public and private financial structures. Sanzillo has experience in public policy and has testified as an expert witness, taught energy industry finance and is quoted frequently in the media. He has 17 years of experience with the City and the State of New York in senior financial and policy management positions. As the first deputy comptroller for the State of New York Sanzillo oversaw the finances of 1,300 units of local government, the annual management of 44,000 government contracts, and over $200 billion in state and local municipal bond programs as well as a $156 billion global pension fund.

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The footnotes and white paper are posted at https://ieefa.org/media/3397/download?attachment